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Monetary policy under Shariah law

December 22, 2011

This never crossed my mind before, but here’s a quote from the Times on Iran’s difficulty fighting inflation:

“Economists said the Iran government is hampered in its ability to control inflation partly because of Islamic prohibitions on charging interest, which prevents banks from offering attractive rates that would encourage Iranians to keep their money in savings accounts.”

The suggestion is that they’ll not only have difficulty fighting inflation, but we could also see money leaving banks, as it did in the US in the 1980s under Reg Q, when deposit rates were fixed. If anyone knows more about this, please pass it on.

One Response to “Monetary policy under Shariah law”

The central bank’s website has a lot of interesting information. The central bank’s policy instruments include directly setting the deposit and lending rates for banks–something the US Fed, for example, doesn’t do. These rates have to be in accordance with the Law for Usury Free Banking, however. The problem seems to be that this law regulates the profit rate of banks, which is set by the Money and Credit Council.

This issue comes up in the US, too. Minneapolis has a large Muslim population, and I remember talking to people at the Minneapolis Fed who were working on ways to help them obtain intermediation in accordance with their faith.